There's no doubt that lots of overseas investors - especially the sophisticated ones - have in the past been put off the Romanian property market because of the unavailability of finance.

In fact, the previous lack of finance was one of the reasons why Property Secrets held back on Romania somewhat, until relatively recently, when we were able to source a mortgage product for overseas investors.

Yes, the capital growth was outstanding, but even the best capital growth can look pretty paltry if it's in a market where gearing is not possible or the mortgage market is not developed. Paltry, that is, relative to markets with far less dramatic growth, but where high levels of gearing are possible.

The mortgage market for foreigners in Romania is still at a very early stage of development, of that there's no doubt. And there's also no doubt that the finance market for overseas investors is not yet as competitive as elsewhere.

BUT, this is actually a key reason why Romania offers such exciting potential for investors.

Why ROI matters

Let's look first at why gearing delivers on ROI, whereas a market without finance doesn't - even if it is delivering strong capital growth.

If you know all this, skip down to 'Mortgage market changes'.

There are often reasons why even markets demonstrating extremely rapid price growth may be bad investment targets.

It is vital not to be blinded by headline price growth figures and to look instead at return on your investment.

This is key.

Market A might be growing at 100% a year (unlikely, we know); but it will not offer the same return on investment if there is no finance there as market B, which is growing at 25%, but offering mortgages at 80% loan to value (LTV).

Here's why:

In real terms, of course, the market A investment has made a profit of £50,000 compared to a profit of only £12,500 in market B.

But if we then invest the same £50,000 in market B as we did in market A, we can buy FIVE properties and we can see the multiplying effect in full force!

That profit of £12,500 becomes £62,500 for market B compared to the same £50,000 for market A.

Obviously, this is an extreme example - few markets rise at 100% a year! So, the effect of gearing will be even more pronounced in more realistic circumstances.

Mortgage market changes

OK, so how does this apply to the Romanian market, where we've already said we're seeing terrific capital growth, but where there is as yet no real competition among mortgage lenders competing for business from overseas investors?

Here's the key - the sophisticated mortgage products are coming!

How do we know this? We know it for two reasons - we look at parallel markets and we have our own market intelligence.

When we look at the pattern of development in other markets, we can se the growth of the mortage market as inevitable AND we can see the timescale of this growth. Bulgaria offers an excellent parallel because until some two years ago the availability of finance for foreigners was, like Romania until very recently, non-existent.

So, the parallel is clear - two years ago, no finance for foreigners in Bulgaria and then the first lender began offering a product for foreign investors.

In Romania there were zero finance products available for foreigners until a few weeks ago. Following a change in the law earlier this year to make it legal to lend to foreigners, Property Secrets identified what was the very first product on the market.

The law on lending in Romania is still quite strict and right now it is still illegal to lend more than 75 per cent LTV, even to domestic borrowers.

So, what is available in Romania? Right now there are still a number of restrictions, longish processing times and higher rates for foreigners who will only achieve 75 per cent LTV over 20 years.

But already our market intelligence has revealed that two new products are coming to market. Changes are coming and these are changes - the wider availability of more attractive borrowing terms for foreigners - that will drive the property market.

The Bulgarian experience

So, while the choice of finance right now is poor, its wider availability in 18 months or a couple of years time as the finance market develops, means an investor now can take advantage of great capital gains and then take advantage also of far more flexible finance when their off plan investment completes.

Again, we know this because this is what happened in Bulgaria.

Two years ago, the first mortgage product emerged. Its terms were poor - high rates over a 20-year period, high fees of two per cent, and a year to get approval. After all that, an investor would probably get a maximum of 70 per cent LTV at around nine per cent.

Once rival products emerged, pretty much offering the same terms as the first, what we saw was the first product being made more attractive to capture market share - and at that point market forces kicked in. Competition has increasingly made mortgage products in Bulgaria more attractive.

And the situation now? The situation now in Bulgaria is as we confidently predict it will be in 18 months or two years down the line in Romania.

Six or seven banks offer mortgages to foreigners in Bulgaria at 80 per cent LTV, with much lower rates than previously (around 6.5 per cent), and much lower fees. Processing time has been slashed from 12 months to three.

Products offering interest only repayment periods are also available. There is now even a basic BTL mortgage available in Bulgaria - effectively a self-cert product. Obviously, this carries higher fees and less attractive terms, but the pattern of development is what is interesting rather than the detail.

Mortgage pattern to be repeated in Romania

It's interesting because this is exactly what will happen in Romania - and fast!

As we get nearer to EU accession and as competition rapidly increases we have no doubt Romania's lending market will become ever more competitive and sophisticated, just as Bulgaria's has done.

After the first bank enters the market pace others follow and then more still, all competing for market share and all trying to offer more appealing products than the competition. For the consumer - the investor - that's great news.

Of course, changes in the mortgage market won't only apply to lending to foreign investors. Rules in Romania on lending in the domestic market will also be increasingly relaxed in line with EU norms. This will have an even more significant effect on the market with increased money supply driving price growth even higher.

So, while capital growth is high now, but finance less attractive, that second factor can pretty much be discounted because the off-plan buyer can take advantage of accelerated growth for the next 18 months or so while the mortgage market develops.

Mortgage penetration is ultra low = a measure of growth potential

It's also worth considering the level of mortgage penetration in Romania, as this is a great indicator of potential growth in a property market.

The following data comes from ERSTE Bank

• AUT - Austria
• SK - Slovak Republic
• HU - Hungary
• CZ - Czech Republic
• SR - Slovenia
• RO - Romania

Only Slovenia - for very different reasons - has a lower mortgage penetration rate than Romania. And, as ERSTE Bank points, out the average annual growth in lending in all the above developing countries ranges from 40 to 60 per cent.

Overall lending in Romania is growing at a phenomenal rate and it is really only at the beginning of its relationship with credit.

Again ERSTE Bank has plotted its position relative to banking services along with other markets in the region.

Click to Enlarge

ERSTE Bank

As we can see from the data compiled above from central banks and Eurostat, Romania's banking industry has only very recently moved into the development phase where mortgage lending will come to the fore.

For the long-term investor, this means this is a market offering extraordinary potential for exceptional capital growth, AND because we are now seeing the mortgage market transforming, exceptional ROI as well.

This is the seond part of a two part article on Romania. You can read Part I here...